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The tables below show, respectively, the characteristics of two annual-pay bonds from the same issuer with the same priority in the event of default, and spot interest rates. Neither bond’s price is consistent with the spot rates. Using the information in these tables, recommend either bond A or bond B for purchase. Bond Characteristics                                                                 Bond A         Bond B Coupons                                                 Annual           Annual Maturity                                                  3 years           3 years Coupon rate                                             10%                  6%                    Yield to maturity                                      10.65%              10.75% Price                                                           98.40                88.34 Spot Interest Rates Term (Years)        Spot Rates (Zero-Coupon) 1                           5% 2                           8 3                          11

The tables below show, respectively, the characteristics of two annual-pay bonds from the same issuer with the same priority in the event of default, and spot interest rates. Neither bond’s price is consistent with the spot rates. Using the information in these tables, recommend either bond A or bond B for purchase. Bond Characteristics                                                                 Bond A         Bond B Coupons                                                 Annual           Annual Maturity                                                  3 years           3 years Coupon rate                                             10%                  6%                    Yield to maturity                                      10.65%              10.75% Price                                                           98.40                88.34 Spot Interest Rates Term (Years)        Spot Rates (Zero-Coupon) 1                           5% 2                           8 3                          11

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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The tables below show, respectively, the characteristics of two annual-pay bonds from the same issuer with the same priority in the event of default, and spot interest rates. Neither bond’s price is consistent with the spot rates. Using the information in these tables, recommend either bond A or bond B for purchase.

Bond Characteristics

                                                                Bond A         Bond B

Coupons                                                 Annual           Annual

Maturity                                                  3 years           3 years

Coupon rate                                             10%                  6%                    Yield to maturity                                      10.65%              10.75%

Price                                                           98.40                88.34


Spot Interest Rates

Term (Years)        Spot Rates (Zero-Coupon)

1                           5%

2                           8

3                          11

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